Apart from the different traditional sources of raising finances, the Indian companies raised overseas debt through the Foreign Currency Convertible Bonds (FCCBs), which offer several advantages for the Indian Inc. This article focuses on the fundamental concepts of the FCCBs, their legal framework, tax treatment, advantages and disadvantages.

In recent times, the new trend of corporate financing is gaining ground. Until recently, only two options were available for the Indian corporate to raise overseas debt - either by way of External Commercial Borrowings (ECBs) which are simple debt and continues to remain debt and cannot be converted to equity or by way of Foreign Currency Convertible Bonds (FCCBs) which are basically a debt instrument convertible into equity issued in a currency different than the issuers' domestic currency. A convertible bond is a mix between a debt and equity instrument. It acts like a bond by making regular coupon and principal payments but these bonds also give the bond-holder the option to convert the bond into stock. According to the provision of Foreign Exchange Management Act, 1999 (FEMA) and applicable rules and regulations issued there under the FCCB means a bond issued by the Indian company, expressed in foreign currency and the principal and interest in respect of which is payable in foreign currency. The definition is silent about convertibility. In fact, the FCCB is essentially a debt instrument convertible into equity of the company (the borrower) after a pre-decided period, at a strike price, usually at a premium to the price of the share at the time of issue. Investors make profit, if strike price is lower than declared price and makes a loss if strike price is more than the traded price. Conversion is discretion of an investor. If he chooses not to convert, he holds the securities till maturity and receive regular interest payments and principal on redemption.

The FCCB is a quasi-debt instrument, which can be converted into company's equity shares if the investors choose to do so at a pre-determined strike rate. The FCCB issues have call and put options to suit the structure of the bond. A call option entitles the issuer to "call" the loan and make an early redemption. On the other hand, a put option entitles the lender to exercise the option to convert the FCCBs into equity; both the options are subject to the RBI guidelines. The interest components or coupon on FCCBs is generally less than on normal debt paper of foreign currency loans or ECBs. This translates to cost savings to the issuer company. The coupon on bonds can also be zero as in case of Zero Coupons Bonds (ZCB) in view of attractiveness of options attached to them. In case of ZCB, the holder is basically interested in either conversion of the bonds in equity or capital appreciation. FCCBs are generally issued by the corporate: which have high promoter share holding and hence do not perceive any risk of losing management control even after exercise of conversion option.

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